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UBS ups its financial wellness game
UBS Equity Plan Advisory Services (EPAS) has released a financial wellness digital content offering to participants in the retirement plans it serves. The move follows an announcement earlier this year of “a re-imagined and education-focused digital user experience” for more than 800,000 plan participants.
The new content experience delivers videos, infographics, articles and “gamified” content to teach employees about planning, budgeting, saving, managing debt, investing, and retirement.
The offering is based on research on participants’ needs and wants, gathered from UBS’s corporate clients. This included researching HR related topics, such as employee retention, motivation and length of service.
EPAS will collaborate with Napkin Finance, Aon Equity Services and Imprint, to educate participants about equity compensation and their money, said Michael Barry, head of UBS Equity Plan Advisory Services at UBS Financial Services Inc., in a release.
The debut of the digital content is part of a broader financial wellness rollout to UBS’s more than 10,000 corporate clients, clients and prospective clients. The full offering will provide financial assistance from licensed UBS Financial Advisors, including a wellness assessment, seminars and webinars.
Other UBS partners include SigFig, to develop a digital advice platform; Solium, to deliver a platform for Global Equity Plan Administration; BlackRock, to offer Aladdin Risk for Wealth Management for UBS Financial Advisors; and Broadridge, to create a wealth management industry platform.
© 2018 RIJ Publishing LLC. All rights reserved.
Tax Cut and Tech Brighten US Economic Outlook
“This time is different.” Economists say that all the time, but it never is. But we believe this time really is different largely because of improved fiscal policy and technological developments. The combination of the two is boosting GDP growth, not just for a year or two but for a protracted period, causing our standard of living to climb more rapidly, keeping the inflation rate in check, and fundamentally altering the oil market. The economic future of this country is far brighter today than it was a decade ago.
First, it is difficult to over-estimate the importance of the corporate tax cut. In 2015 and 2016 growth in investment spending came to a halt as business confidence sank. That was the worst performance for investment since the recession. Productivity growth slowed to a trickle. GDP growth shrank to a disappointing 2.0% pace, which became “the new normal.”
But then Trump pushed through his corporate tax package, which included a cut in the corporate tax rate from 35% to 20%, the ability for large multi-national firms to repatriate overseas earnings to the U.S. at a favorable 15% tax rate, an immediate tax deduction for equipment spending, and a massive movement to eliminate unnecessary, conflicting and confusing government regulations. Suddenly corporate confidence soared. Business leaders opened their wallets and began to spend money on investment.
The pickup in investment spending lifted productivity growth from 1% to 2%. That, in turn, boosted GDP growth from a sleepy 2.0% pace to 3.0%.
But is the recent faster GDP growth a temporary spurt triggered by the tax cuts, or something longer lasting? We believe it is the latter. The 20% corporate tax rate is now competitive with almost all other developed countries. Massive deregulation encourages businesses of all types—small firms in particular—to formulate long-term plans and invest accordingly. The tight labor market encourages firms to spend money on technology to make existing employees more efficient, thus increasing output without increasing their headcount. In economic jargon, they are substituting capital for labor, which boosts productivity growth.
If the pickup in investment spending lasts, productivity growth will accelerate from its anemic 1.0% pace to a steady 2.0%. That will boost the economy’s speed by one percentage point from 1.8% to 2.8%. A near-3.0% GDP growth rate is welcome relief from a few years ago.
If GDP growth accelerates by 1.0%, our standard of living will grow by 1.0%, from today’s 1.5% to 2.5% by the end of the decade. This faster GDP growth comes about partly because of the fiscal policy described above, but also because of technology.
Technology has altered our way of doing business. The Internet came into existence in 1995. The cloud and apps followed in the early 2000s. Those developments revolutionized the way that we all communicate with each other.
Amazon was founded in 1994 and followed quickly by eBay and Google. On-line shopping skyrocketed. Before we purchase anything today, we check prices on the Internet. We can find the lowest price anywhere around the globe. As a result, traditional brick and mortar stores have no pricing power. Should they choose to raise prices, they lose sales. This is having a profound influence on the inflation rate.
In the past year the core CPI has risen 2.2%. If we split the CPI into two parts—goods and services—we find very disparate movements. In the past year, goods prices have declined 0.3%. In contrast, services have risen 3.0%. This outcome highlights the complete inability of goods-producing firms to raise prices.
In the absence of online shopping, we would be looking at a 3.0% inflation rate today rather than 2.0%. That would be far above the Fed’s 2.0% inflation target, and with 3.0% GDP growth (well in excess of the Fed’s estimated 1.8% potential growth) the Fed would be raising interest rates aggressively and the end of the expansion would almost certainly be in sight. But technology has changed that scenario. Inflation remains close to the Fed’s target, which means the Fed can pursue a very gradual return to higher rates with little risk of dumping the economy into recession. All because of technology.
Finally, think about the oil market. Technological improvements like fracking and horizontal drilling have caused U.S. oil production to double in the past seven years.
As a result, the U.S. has surpassed Saudi Arabia and Russia and become the world’s largest producer of crude oil. Next year the U.S. Department of Energy expects U.S. output to climb an additional 10% and further widen the gap between U.S. production and that of its two closest rivals. As a result, OPEC countries no longer have a stranglehold on global oil production. Should they choose to curtail production to inflate oil prices, U.S. drillers can quickly step on the gas and counter much of the shortfall. The U.S. has become a major player in the global oil market. Because of technology.
The world is a different place today than it was 10 years ago. Improved fiscal policy caused by the tax cuts and deregulation have re-invigorated the previously dormant U.S. economy. Technology has changed the entire economic landscape. Because economists have no relevant history to use as a model for the future, we are all flying by the seat of our pants. I believe sustained investment spending and faster productivity growth will boost potential GDP growth from 1.8% to 2.8% within a few years. Others think the recent GDP surge will soon fade and that a recession is looming by 2020. Who is right?
Then, to what extent can we count on technology to suppress inflation?
Finally, how much has the revival of U.S. oil production altered the balance of power between OPEC countries and the rest of the world? What does that mean for oil prices?
Keep in mind that technology is not static, which raises even bigger question. What next “big thing” will fundamentally alter the economic landscape? These sea changes make economics fun—but also challenging.
© 2018 Numbernomics.
Dutch pensions face possible benefit cuts
Falling equity markets and lower interest rates hurt the funding levels of the four largest Dutch pension funds in October, prompting them to contemplate benefits cuts to participants, IPE.com reported.
Two metal industry pensions, PMT and PME, drew closer to imposing benefit cuts in 2020 after figures published last week showed that their funding ratios had declined three percentage points, to about 101%.
PME said it had already been communicating to members the risk of cuts through all its information channels during the past year. “We are trying to find a balance between warning and unnecessarily worrying our participants,” it said. Cuts can be spread out over a 10-year period, but they are unconditional and cannot be reversed.
The MSCI World index declined by 6.7% during October and the 30-year swap rate dropped almost three basis points, to 1.5%. Interest rates are crucial for discounting future pension liabilities.
Civil service pension ABP saw the value of its assets drop 2.8% to €407bn, while its liabilities rose 0.1% to €399bn. To avoid benefit cuts, its funding ratio must rebound to the required minimum of about 105% by year-end. Benefit cuts must be applied when a plan has been underfunded for five consecutive years.
To PMT and PME, their funding at the end of 2019 will be crucial to avoid cuts. At the end of October, their coverage ratios stood at 102.5% and 101.7%, respectively, compared to the required 104.3%.
© 2018 RIJ Publishing LLC. All rights reserved.
Honorable Mention
Amid rising sales, Lincoln issues new bonus FIA
Lincoln Financial Group this week launched the Lincoln OptiBlend Plus fixed indexed annuity (FIA), which offers the same fixed and indexed accounts as Lincoln OptiBlend 10, plus an immediate 6% bonus added to the account value.
The product offers three index-linked interest crediting strategies in addition to a fixed account option for accumulation.
An optional lifetime income rider, Lincoln Lifetime Income Edge, is also available with Lincoln OptiBlend Plus and can be elected at issue or added on a contract anniversary for an additional cost.
“Lincoln OptiBlend Plus builds on the success we’ve seen with our Lincoln OptiBlend 10 fixed indexed annuity,” said Tad Fifer, head of Fixed Annuity Sales and RIA Sales & Strategy at Lincoln Financial Distributors. Expansion in the fixed indexed annuity market has contributed to Lincoln’s fixed annuity sales more than doubling, to nearly $900 million in the third quarter, the Lincoln release said.
Seventy percent of pre-retirees claim they can afford to lose only 10% or less of their savings before feeling forced to adjust their retirement plan or savings goals, a recent Lincoln-sponsored survey showed. Among those less than three years away from retirement, 87% were concerned with protecting their accumulated wealth.
TIAA Bank acquires leases and loans from GE Capital’s healthcare business
TIAA Bank has acquired a $1.5 billion portfolio of healthcare equipment leases and loans from GE Capital’s Healthcare Equipment Finance (HEF) business. The move expands the bank’s commercial banking business and enhances its ability to serve institutional clients and healthcare providers, according to a release from the bank.
The acquired healthcare portfolio includes loans and leases to approximately 1,100 hospitals as well as 3,600 physician practices and diagnostic and imaging centers across the United States. Assets financed include imaging, monitoring, respiratory, surgical, ultrasound and lab equipment.
TIAA Bank and GE Capital have also entered into a five-year vendor financing agreement for U.S. customers of GE Healthcare. GE Healthcare Equipment Finance’s team will continue to originate and service transactions under a co-branding arrangement with TIAA Bank.
Executives involved in the deal include Lori Dickerson Fouché, senior executive vice president and CEO of Retail & Institutional Financial Services at TIAA, Blake Wilson, CEO of TIAA’s Retail Financial Services and chairman and CEO of TIAA Bank, and Trevor Schauenberg, president and CEO of GE Capital Industrial Finance.
MassMutual names Carroll as new head of Workplace Distribution
MassMutual has appointed Bob Carroll as its new head of Workplace Distribution. Reporting to Teresa Hassara, head of Workplace Solutions for MassMutual, he will be responsible for executing the firm’s workplace distribution strategy, developing sales talent, increasing revenue and growing MassMutual’s share of the retirement and worksite markets.
Carroll will also represent MassMutual as a thought leader in the retirement and voluntary benefits markets, and partner with key accounts and relationship management teams to drive business growth and retention, a MassMutual release said.
Carroll comes to MassMutual from John Hancock Financial Services, where he was most recently Vice President of National Sales, spearheading strategy for retirement plan product development, marketing, and product distribution through broker dealers, RIAs, and third-party administrators. Previously, he served in a variety of sales leadership roles at Hancock.
Carroll has a Bachelor of Science in Finance and Business Administration from Illinois State University and Series 7, 24 and 63 licenses.
MassMutual provides retirement savings plans through advisors for mid-, large and mega-sized employers in the corporate, Taft-Hartley, government and not-for-profit markets. Its voluntary group benefit offerings include whole life, universal life insurance, critical illness and accident coverage, and executive life and disability income insurance.
The company maintains two nationwide wholesaling networks, including 70 managing directors who support retirement plans in the institutional and emerging markets, and 15 voluntary benefits wholesalers. MassMutual said it plans to expand its voluntary benefits wholesaling team to 21.
Investors Heritage Life enters MYGA annuity business
Investors Heritage Life, a Kentucky-domiciled life insurer specializing in preneed life and final expense insurance, has launched Heritage Builder Annuity, a single-premium deferred, multi-year, rate-guaranteed (MYGA) annuity.
The annuity marks the first product introduced Investors Heritage went private in a transaction with Aquarian Holdings in March, said Harry Lee Waterfield II, Investors Heritage CEO, and John Frye, operating partner at Aquarian, in a release.
The Heritage Builder Annuity was developed after consultations between Investors Heritage, Aquarian and leading annuity distribution companies, the release said. Investors Heritage and Aquarian also refreshed the insurer’s brand and launched a new website in September.
Rudy Sahay, chairman of Investors Heritage and managing partner at Aquarian Holdings, said in a statement that “this annuity [will be] the first of many to come.”
Employer Match vs. Auto-Enrollment; The Winner Is…
As sponsors of 401(k) plans, employers can boost plan participation by automatically enrolling new employees in plans–a practice made possible by the Pension Protection Act of 2006). They can also raise participation and contribution rates by matching a portion of each employee’s contributions.
There’s been some debate over the years about which factor—auto-enrollment or the (more expensive for the employer) match—drives participation more. A study by a team of Harvard and Yale economists in 2007 showed that most auto-enrolled participants will stay in a plan even if the employer suspends its match.
The match may be more important than previously thought, however. The results of a recent study by analysts Nadia Karamcheva and Justin Falk of the Congressional Budget Office’s Microeconomic Studies Division found that “most of the estimates from the literature substantially understate the effect of matching.”
The analysts took advantage of two natural experiments. Before 1984, the federal government offered only a defined benefit pension (without Social Security). In 1984, it began offering federal employees a defined contribution plan (the Thrift Savings Plan or TSP) with a match. It allowed people under the old CSRS system to also contribute to TSP, but with no match. This change provided an opportunity to test the impact of a match on contribution rates.
The second natural experiment took place in August 2010, when the government implemented a policy of automatic enrollment with a default contribution rate of three percent and the “G Fund” as the default investment option. (The G Fund invests in government securities. Its yield is based on the yield for Treasury notes.) This change provided a test of the impact of auto-enrollment.
A microeconomic analysis of the results of these two natural experiments showed that the match had a bigger effect. It increased contribution rates by 22 percentage points. Auto-enrollment increased it by 19 percentage points.
Looking at the long-term impact of the matching contribution, the analysts found that for those with a match, the average ratio of balance to pay was 2.5 to 1 (after an average accumulation period of 28 years). The average ratio of balance to pay for those without a match was 0.8 to 1. Looking at the impact of auto-enrollment (over an average accumulation period of five years), the average ratio of balance to pay was the same (0.4 to 1) for those who were hired just before and just after auto-enrollment was introduced.
In the 2007 Harvard-Yale study, the economists studied the behavior of participants whose plan sponsor switched from a matching contribution to a voluntary employer contribution not contingent on a worker’s contribution. They found that participation rates declined by “at most five to six percentage points” and average contribution rates fell by 0.65%.
Our “results suggest that the match has only a modest impact on opt-out rates,” wrote John Beshears, David Laibson and Brigitte Madrian of Harvard and James Choi of Yale in a 2007 paper, “The Impact of Employer Matching on Savings Plan Participation under Automatic Enrollment.” The same team also looked at data from nine different employers who all used auto-enrollment and varying match structures. It drew similar conclusions.
“We find that a one percentage point decrease in the maximum potential match as a fraction of salary is associated with a 1.8 to 3.8 percentage point decrease in plan participation at six months of eligibility,” the paper said. “We estimate that moving from a typical matching structure of 50% up to 6% of pay contributed to no match would reduce participation under automatic enrollment at six months after plan eligibility by 5 to 11 percentage points.”
The CBO and Harvard studies are quite different, so it’s impossible to say which carries more weight. CBO examined the effect of a match on workers who did not have auto-enrollment, whereas other researchers have looked at the effect of taking away the match from workers who have auto-enrollment.
© 2018 RIJ Publishing LLC. All rights reserved.
Fixed annuities see year-over-year sales improvement: Wink
Non-variable annuity sales for the third quarter of 2018 were up 4.72% over the prior quarter and 46.26% higher than in the same period last year, based on preliminary sales data gathered by Wink’s Sales & Market Report. Non-variable deferred annuities include the indexed annuity, traditional fixed annuity, and MYGA product lines.
Indexed annuity sales increased by more than 2% over the prior quarter and by more than 38% over the same period last year. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500.
Traditional fixed annuity sales increased by 16.7% over the prior quarter and rose by 28.7% over the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.
Sales of multi-year guaranteed annuities (MYGA) increased by 8.1% over the prior quarter and were up 63.4% over the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.
“Recent increases in annuity rates, coupled with incentives being offered by product manufacturers have really translated to sales momentum!” said Wink CEO Sheryl Moore.
Structured annuity sales are estimated to be up nearly 40% from the prior quarter. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts. “These aren’t indexed annuities, although some companies are marketing them in that manner,” Moore said.
These preliminary results are based on 94% of participation in Wink’s quarterly sales survey representing 97% of the total sales.
Wink currently reports on indexed annuity, fixed annuity, multi-year guaranteed annuity, structured annuity, and multiple life insurance lines’ product sales. It plans to report on variable annuity and all types of income annuity product sales in the future, a release said.
© 2018 RIJ Publishing LLC. All rights reserved.
Brand-strength of robos is still fairly weak: Cerulli
Almost six in 10 investors (59%) were not aware of any of names of 10 digital advice platforms that were offered to them in a questionnaire, according to a recent survey of investors by Cerulli Associates, the research and consulting firm.
The ten companies (in order of brand-recognition) were Betterment, Merrill Lynch Edge, Go (Fidelity), Intelligent Portfolios (Schwab), Vanguard Personal Advisory Services, Acorns, Wealthfront, Essential Portfolios (TD Ameritrade) Adaptive Portfolios (E*Trade), and Personal Capital.
Awareness of the names of the ten robo-advisors and robo/human hybrid platforms varied by age. Younger investors, predictably, were more aware of the digital advisors than older ones. The percentage answering “none of the above” after seeing the list ranged from 34% (among those under age 30) to 75% (among those age 70 or older).
Cerulli’s fourth quarter 2018 issue of The Cerulli Edge—U.S. Retail Investor Edition details the efforts of 10 of the leading digital-focused financial advice platforms in establishing brand awareness among retail investors and looks at the degree of familiarity that each firm has achieved among prospective investors on a wealth tier basis.
“While increasing awareness is an excellent near-term goal, the ability to accumulate assets under management will determine the ultimate success of these platforms,” said Scott Smith, director at Cerulli, in a press release.
“The largest platforms are affiliated with firms with a long history of serving investors directly, largely through brokerage relationships. In many cases, investors on these platforms began their relationships with the intention of remaining completely self-directed, but eventually found the responsibility more burdensome than rewarding.
“During the five-year time horizon, conversion of brokerage clients to advisor relationships at the largest direct providers will be the primary driver of the digital advice segment,” Smith said. “But more recent entrants’ persistent efforts will allow them to consistently improve their awareness levels among affluent investors and achieve sustainable scale.”
© 2018 RIJ Publishing LLC. All rights reserved.
OregonSaves, a state-sponsored workplace IRA, welcomes ‘gig’ workers
Self-employed persons, gig economy workers and other individual workers in Oregon can now participate in OregonSaves, the state of Oregon’s public savings option for workers without a savings option at work.
OregonSaves began with a pilot program in July 2017 and is expanding statewide in waves under the direction of Oregon Retirement Savings Board and State Treasurer Tobias Read.
Since the first wave of the program launched in November 2017, tens of thousands of workers have saved more than $9 million towards retirement, according to an OregonSaves release this week. More than 45,000 employees have enrolled through a facilitating employer. Participants in OregonSaves contribute $114 per month on average.
OregonSaves offers Individual Retirement Accounts (IRAs) that are designed to follow workers throughout their careers. Individuals can sign up at saver.oregonsaves.com and save as little as $5 per month through automatic contributions from their bank accounts or through payroll deduction. A simple menu of investment options is available
Oregon workers will continue to be enrolled automatically in OregonSaves if their employer facilitates the program. Oregon employers that do not offer an employer-sponsored retirement plan for their workers are joining the OregonSaves program in a series of waves.
The deadline for the next wave, for employers with 20 or more employees, is December 15, 2018. The program will be fully implemented by the end of 2020.
The retirement savings gap in America is estimated to be at least $6.8 trillion and growing, and more than half of workers have saved nothing, according to the National Institute for Retirement Security. In Oregon, an estimated one million workers lack access to a work-based retirement plan.
“With stylists, usually they don’t retire—they don’t have a retirement,” said Molly Finster, stylist for Annastasia Salon and an OregonSaves participant. “[OregonSaves] makes me feel like I actually have a career, and that’s what I’ve always wanted. Even for my parents to know that I can retire, that I’ll have a retirement someday, is huge … huge.”
© 2018 RIJ Publishing LLC. All rights reserved.
Britain test-drives “sidecar” accounts in state-run DC plans
The “sidecar” savings account—a source of emergency cash that rides beside a worker’s retirement account—is being piloted in Britain by the National Employment Savings Trust (NEST), the UK’s nationwide, public-option, auto-enrolled defined contribution plan.
The first employer to test the savings account concept will be Timpsons, a chain of shops specializing in shoe repair. Timpsons will offer the service to its 5,600 workers starting next year, according to a report this week at IPE.com.
In the U.S., the Family Savings Act of 2018, recently passed by the House of Representatives, would clear the way for similar “rainy day” accounts within 401(k) plans in the US. Such funds are inspired by the fact emergency expenses force millions of Americans to dip into their 401(k) accounts.
Title III of the Family Savings Act “permits an individual to establish a universal savings account. An individual may contribute up to $2,500 each taxable year and withdraw the funds tax-free and without penalty at any time and for any use.”
In the UK, the sidecar accounts are designed to improve what officials call “financial resilience.” Employees can save into what NEST has dubbed “jars.” Plan contributions above the auto-enrollment minimum (currently 8% of salary) will overflow into the sidecar savings account until the sidecar balance reaches £1,000. Subsequent contributions go to the retirement fund.
The account would be labeled “for emergencies.” Studies have shown that this kind of framing can influence how judiciously people use the money. Once the sidecar balance falls back below the cap, contributions will automatically split again to pay into both accounts, until the savings account rises to its limit again.
Caroline Rookes, a trustee at NEST and chief executive of the UK’s Money Advice Service (MAS), said roughly a quarter of the UK population had no savings for sudden emergencies.
NEST, which manages £3.8bn (€4.4bn), developed the model with help from the Harvard Kennedy School. JP Morgan Chase’s charitable foundation and MAS are providing financial resources for the trial, while Salary Finance will provide the savings accounts.
© 2018 RIJ Publishing LLC. All rights reserved.
‘Auto-Portability’ Gets Closer to Reality
“Auto-portability,” a technology that would expedite a participant’s assets from one 401(k) plan to another when he or she changes jobs, moved closer to reality this week.
The Department of Labor proposed a “prohibited transaction exemption,” or PTE, that would allow Charlotte, NC-based Retirement Clearinghouse (RCH) to offer such a service.
The CEO of RCH (formerly RolloverSystems) is Spencer Williams, a former MassMutual executive. The executive vice president who worked with him to obtain the ruling is Tom Johnson, Head of Policy & Development, also a life insurance industry veteran. Robert L. Johnson (no relation), founder of Black Entertainment Television, owns RCH.
RCH had sought the PTE for several years; the exemption would allow RCH to default participants into its program and charge a fee for its plan-to-plan transfer service, as long as RCH meets a list of DOL conduct requirements.
The public policy argument for auto-portability is that it can prevent “leakage” from 401(k) plans when people change jobs. Too often, workers withdraw small balances when they change jobs rather than roll their money into their next plan–a process that employers don’t necessarily make easy. The problem affects low-income people the most, since they change jobs more often, are more likely to have small account balances, and are more likely to need the cash for emergencies.
The DOL will accept public comments on the proposal for the next 45 days. Once the PTE is granted, RCH, which has piloted the program and proven the concept, will work on building a network of recordkeepers and plan sponsors to use the service.
“The advisory opinion is especially important to the plan sponsor. It makes clear the plan sponsor is not a fiduciary. Plan sponsors are averse to things that are not clear in the law today. By naming us as a fiduciary and granting us relief, the PTE also allows us to get paid for the roll in service,” Williams told RIJ this week.
“There are a significant number of conditions that we have to meet. Early on, we’ll have to prove that our fees are reasonable. There is also an extensive system of notices that we have to provide to participants to ensure that it’s a voluntary system. DOL is only granting the exemption for five years. The comment period for the Proposed Exemption closes on Dec 24th and we would expect the final Exemption to be issued 2-3 months later.”
Williams and RCH vice president Tom Johnson, with guidance from Groom Law Group, spent much of the past five years speaking to various groups about auto-portability and building bipartisan support it.
“We went to nearly all the groups that have a dog in this fight, on the left as well as the right,” Johnson said. “At one point we were asked, ‘Whose ox do you gore with this?’ And I said, ‘Other than Bob’s Big Screen TV Outlet, everybody wins.’” (The reference was to the perceived conflict that some 401(k) participants have between saving and buying a large smart television.)
“To deliver auto-portability we have to create a giant network where RCH sits at the hub and the recordkeepers are the spokes,” Johnson said, noting that as few as 10 large recordkeepers account for 80% of the 401(k) business in the U.S. “We have to go to the recordkeepers and ask them to implement our technology. It’s not complicated, but it still represents a technology spend.
“Along the way, you also have to create transmission standards. We act as an aggregator so that the recordkeepers don’t have to talk to each other, just to us. We’ll have transmission standards for that,” he added. RCH acts as the transmitter of assets and data from one plan to the next, not as an asset custodian. Independent custodians will warehouse the small accounts after they leave one 401(k) and before they arrive at the next.
© 2018 RIJ Publishing LLC. All rights reserved.
Ohio National Sued for Compensation Breach
A Whitehouse, Texas, financial advisor has filed a federal class action suit against Ohio National Life in Ohio Southern District Court for allegedly refusing to pay future trail commissions on certain variable annuities with lifetime income riders that he and other broker-dealer reps have sold in recent years.
The suit, filed by advisor Lance Browning of Income Solutions Wealth Management, claims that Ohio National should continue paying him $89,000 a year in annual commissions that he earned by selling about 100 Ohio National annuity contracts that are still active.
On November 5, Commonwealth Equity Services, a Waltham, Mass., broker-dealer filed a similar suit against Ohio National in Massachusetts U.S. District Court. A third suit filed on November 8 in Ohio Southern U.S. District Court against Cincinnati-based Ohio National by Veritas Independent Partners, a Conway, Arkansas, broker-dealer.
In September, Ohio National’s assistant general counsel sent a letter telling advisors that it was canceling its selling agreements with them and their affiliates as of December 12, and it would no longer pay trail commissions to advisors who sold its products and opted for a combination of up-front and annual commission payments rather than a single large up-front commission.
Letters were also sent by the senior vice president of annuity operations at Ohio National, to variable annuity contract owners offering to buy back their contracts between November 12, 2018 and February 11, 2019. If the client would surrender the contract, Ohio National promised to increase the contract’s “Enhancement Base” by 65% or a 10% enhancement of the “Minimum Enhancement Amount.”
Annuity issuers have in the past offered to buy back variable annuity contracts that are particularly valuable for clients–that is, the account balances alone don’t cover the promised benefits–but by the same token represent significant liabilities for the insurer.
According to the Browning suit:
“Ohio National is unlawfully trying to change the rules after the game has already started. Ohio National has issued billions of dollars’ worth of variable annuity policies with guaranteed income benefit riders. The issuance of these policies involves four parties – Ohio National (the issuer), a broker-dealer (which has a “selling agreement” with Ohio National permitting it to sell the policies), a securities representative (who advises the customer about the policy), and a customer (who purchases the policy). Ohio National has induced the sale of its policies by promising annual, recurring commissions to the broker-dealers and, by extension, the securities representatives, and customers have purchased these policies believing that they will be able to rely on their trusted securities representatives to advise them on how to manage the investments in the policy and whether or when to annuitize or surrender the policy. Having induced the sales of these policies based on these promises, Ohio National has announced that it does not intend to hold up its end of the bargain – it is refusing to pay the promised recurring commissions, and thereby effectively cutting off customers from receiving financial advice about these policies from their trusted financial advisors. Ohio National is not allowed to do that.
“While Ohio National has the right to discontinue future sales of the annuities, it may not unilaterally terminate its obligation to pay trailing commissions on existing annuities.
“Perhaps even worse, Ohio National’s decision to stop paying trailing commissions for which it is already obligated will not even reduce the expenses for investors. The costs of the annuities will not go down one penny. Rather, instead of paying trailing commissions to the broker-dealers and their securities representatives, Ohio National has decided to simply pocket that money itself instead. And incredibly, Ohio National has not even implemented this unfair and improper policy evenly across the board as to all broker-dealers: it is continuing to pay trailing commissions to its own captive broker-dealer, Ohio National Equities, Inc. Furthermore, Ohio National is continuing to pay trailing commissions to broker-dealer Morgan Stanley Smith Barney LLC (“Morgan Stanley”) and its securities representatives.”
Lance Browning has been a securities representative with LPL Financial LLC since August 2012, according to his complaint. Before that, he was with Morgan Keegan and, from 1997 to 2005, with UBS/PaineWebber. All of those firms have selling agreements with Ohio National, which entitles Browning to trail commissions for selling its annuities, the complaint said.
Browning has sold over 100 Ohio National annuities that have currently not been surrendered, annuitized, or under a death claim, according to the suit. It said he has received approximately $89,000 in trailing commissions from Ohio National per year for many years. He claims about $89,000 in trailing commissions in 2019 alone, from those annuities already existing and in place.
© 2018 RIJ Publishing LLC. All rights reserved.
A Retirement Income Plan from United Income
If you heard that Morningstar chairman Joe Mansueto and eBay founder Pierre Omidyar were investing in the same little robo-advisor, you’d probably want to learn more about it. You might even let their start-up manage your savings.
Meet United Income. Since its launch in 2017, only about 300 households have chosen it to manage assets of about $500 million, so it’s tiny. But it’s not obscure: its founding CEO, Matt Fellowes, is the fintech entrepreneur who created personal finance tool HelloWallet and sold it to Morningstar for $52 million. (KeyBank owns it now).
To demonstrate United Income’s capabilities for RIJ readers, one of its ten in-house advisors, Davey Quinn, used the firm’s software to create a retirement investment and spending plan for the M.T. Knestors, a real but anonymous couple with about $750,000 in savings. We present that plan below.
Matt Fellowes
United Income’s approach to income planning avoids annuities and focuses more on the low-cost passive investments and tax-efficient withdrawal strategies that appeal to Boomer and Gen-X households with $1 million or more. To calculate life expectancies, it also incorporates personal health information that other robo-advisors don’t typically ask for or build into their plans.
The plan that Quinn showed us—the first draft of a plan—is outwardly simple and straightforward, which in itself is a bit unorthodox. The plan doesn’t enforce a 4% withdrawal rule, or employ a time-segmentation (bucketing) strategy, or incorporate annuities. It doesn’t rely on mental accounting techniques like setting up emergency funds or capital accounts and sequestering them from income-producing assets. Instead, its algorithms use adaptive, automatic asset rebalancing behind the scenes to offset spikes in spending or market turbulence.
The plan’s main curb-appeal is a projection that the M.T. Knestors could become much richer in the future by following United Income’s suggested asset allocation than by sticking with their existing stocks-to-bonds ratio.
United Income charges 80 basis points per year for its full suite of services, applied to whatever money clients decide to custody with United Income for discretionary management. United Income is built for individual investors, not advisors. It also manages some institutional money.
The ‘M.T. Knestors’
You might remember the Knestors from previous RIJ studies of their case. Besides their savings accounts, they own a home worth about $300,000 and own three paid-off cars. Their mortgage will be paid-off by 2021. Their children have no remaining college debt. After he retires at age 70, Mr. Knestor expects to earn about $2,000 per month as a consultant. The Knestors expect a combined $4,000 per month from Social Security starting in 2021. They told Quinn that they’d like to annuitize Mrs. Knestor’s 403(b) account, which would pay about $1,400 per month (inflation-adjusted) for life.
The Knestors expect these four sources of income to cover their essential expenses ($4,000 per month), discretionary expenses ($1,000 per month), health care expenses ($1,000 per month) and miscellaneous expenses and taxes ($1,000 per month).
For any additional expenses, they’d have to liquidate invested assets. The Knestors expect a number of one-time, big-ticket expenses during their first ten years of retirement: a new roof in 2019, a wedding in 2020, another wedding in 2022, bathroom remodeling in 2025, and a new car in 2026.
United Income’s recommendations
The first draft of the United Income analysis showed that if the Knestors convert Mrs. Knestor’s 403(b) savings of $222,000 to an annuity, the remaining $533,000 would be allocated as follows.
What drives United Income’s asset allocation process?
United Income has an unusual process for assessing their clients’ tolerance investment risk. Each client’s overall risk profile is a composite of his or her tolerances for the risks of failing to meet specific expenses. In other words, United Income weighs the importance to the client of each expense or goal.
“For all spending needs, we ask our members on a scale of 0 to 10, how much risk would you accept for this spending need?” Quinn said. “Most members choose 2-4 for essentials and 6-7 for discretionary expenses. Lastly, members can rank their priority for each of these spending needs and add any additional spending needs as well. For additional spending needs, our members can specify the frequency, length and inflation rate for that goal. In addition, they assign a risk score for these spending needs.”
As those expenses are paid and eliminated, the client’s risk profile and asset allocation changes accordingly.
What withdrawal rate philosophy does United Income use?
United Income doesn’t use the famous-but-flawed 4% “safe withdrawal” rule. According to their plan, the Knestors would withdraw as much 10% or more per year from their savings, including more than $200,000 over three years. That’s because they planned for those big expenses (mentioned above) during the first ten years of retirement.
To maintain a sustainable withdrawal rate in every year of retirement, other advisors might have set up an all-cash “capital expense” fund that would be sequestered from the client’s more risky core income-generating portfolio. This tactic would insulate the core portfolio from “sequence risk”—the risk that high withdrawals and a market downturn might coincide in the early years of retirement, irreparably reducing account balances.
United Income does not prescribe this kind of bucket approach. “Instead of using mental accounting strategies, we factor the costs and risks of specific goals into the client’s recommended asset allocation. We based this target asset allocation on the level of risk for each spending goal,” Quinn told RIJ.
“For instance, if you want to invest conservatively in order to meet a specific expense in the next few years, your asset allocation will incorporate that expense into our calculation of the equity allocation. If the wedding risk score were changed to ‘1,’ then the target stock/bond mix would shift toward bonds. The target asset allocation is re-calculated every day, so each client’s asset allocation changes as each goal is met.”
Will the M.T. Knestors run out of money?
Not according to United Income. Quinn’s plan predicted that their portfolio had a 99% chance of lasting at least for as long as the Knestors live, and United Income predicted, on the basis of the Knestors’ self-reported health status, that they would both live into their 90s.
United Income’s projections showed that, starting in 2026 or so, after an anticipated period of high expenses and lackluster market returns, the Knestors’ net worth would begin to climb steadily. By 2050, if they adopted United Income’s 56% stock/43% bond allocation, the Knestors’ would be worth a projected $2.5 million if future market performance is “typical,” more than $3 million if performance is “very strong,” and $2.2 million if performance is “very weak.”
United Income uses Morningstar Capital Market Assumptions to make its market projections. Those assumptions call for 2.5% to 3.2% growth for a balanced portfolio over the next 10 years, and about twice that performance in subsequent years as the market reverts to its long-term average growth rates.
What about annuities?
Annuities generally aren’t a priority for United Income’s clients, Quinn said. The firm’s clients fall into two categories. About 28% have balances of over $1 million, and 72% have balances under $1 million. They want low cost investments, tax-efficient distribution strategies, and someone to handle their RMDs automatically. But United Income does offer an “annuity service” on its website.
“The annuity service is something that we do as human wealth managers for clients,” Quinn said. “We review any annuities they currently hold and evaluate the cost-benefit of keeping vs. surrendering the annuity. We may recommend an annuity if it makes sense for a client and will help them find an annuity provider to work with. We receive no commissions. We just look for competitive products for our clients. Also, as we have done in this sample plan, our software can analyze and model annuities.”
© 2018 RIJ Publishing LLC. All rights reserved.
Anticipated Increases, Global Mutual Fund Management Fees, 2017-2025 (Projected)
Hybrid vigor: Many RIAs like support from broker-dealers
The hybrid registered investment advisor (RIA) channel is no longer just “a midway point to owning an operating an independent RIA autonomously” but a distinct business model, according to Cerulli Associates’ latest report, U.S. RIA Marketplace 2018: Designing a Framework for Independence.
“The hybrid model has staying power,” said Marina Shtyrkov, research analyst at Cerulli, in a release. “Among advisors who switched to the hybrid model in the past one to five years, only 23% would choose to drop their broker/dealer (B/D) affiliation and move fully to the independent RIA channel if they were to switch firms.”
That may be good news for life insurers who hope to market commission-paying annuities to RIAs. “The appeal of commissionable product access can’t be underestimated, even in a fee-based environment,” said Shtyrkov. “The difference between being a hybrid RIA—with the infrastructure and product support of a B/D affiliation—and an independent RIA is greater than it may initially seem.”
Over the past decade, the hybrid RIA channel more than doubled its share of advisor headcount, to 8.8% from 4.1%. “This migration is primarily from wirehouses and independent broker/dealers (IBDs). Almost one-quarter of advisors who switched to the hybrid RIA channel one to five years ago are either wirehouse or independent B/D advisors,” she said.
The hybrid RIA channel attracts advisors who want autonomy with partial infrastructure, product access (commissionable and fee-based products), and a platform that can support growth. It can also absorb advisors who can’t or don’t want to manage a business and also work with clients, according to Cerulli.
Hybrid RIAs have grown faster than their independent RIA peers, the Cerulli report shows. Across all assets-under-management (AUM) segments from 2012 to 2017, hybrid RIAs saw a higher five-year compound annual growth rate (CAGR) than independent RIAs, thanks in part to their B/D support.
The Cerulli report provides additional insight into the dynamics of the RIA channel, including a comparison of long-term hybrids with transitional hybrids, an analysis of market sizing, advisor attributes, custodian and asset manager relationships, investment decisions and product use, and practice operations and growth strategies.
© 2018 RIJ Publishing LLC. All rights reserved.
Britain’s DB plans roiled by gender equalization
UK corporate defined benefit (DB) pension plunged into deficit on aggregate in October following a High Court ruled that guaranteed minimum pension (GMP) payments could not be paid at different ages for men and women under EU equality laws.
The DB schemes of the UK’s 350 biggest listed companies showed a combined estimated deficit of £36bn (€41bn) on October 31, down from a £3bn aggregate surplus on September 30, according to Mercer Consulting.
“With the continuing backdrop of uncertainty likely to persist in the run up to the UK’s departure from the EU early next year, trustees should evaluate the potential impact on their sponsor’s financial security and put themselves in a position to capitalize on de-risking opportunities as they arise,” said LeRoy van Zyl, a DB strategist and partner at Mercer.
Pension funds were continuing to de-risk their portfolios and crystallize investment profits, Zyl said: “The need for taking selective action was demonstrated again during October as markets stepped back significantly from previous gains.”
Total liabilities rose by £21bn, Mercer said, attributing nearly three quarters of that to the UK High Court ruling. Combined assets fell by £8bn, due in part to falling equity markets. The FTSE All Share index fell 5.1% in October. The MSCI World index fell 5.6% in sterling terms.
While the High Court ruling related specifically to the Lloyds Banking Group pension plans, many other DB funds are expected to have to recalculate benefits and potentially make payments in arrears, according to a report in IPE.com.
Adrian Hartshorn, senior partner at Mercer, said, “Preliminary analysis… has suggested an increase to liabilities of between £15bn and £20bn, with the additional costs potentially flowing through the P&L account.
© 2018 RIJ Publishing LLC. All rights reserved.
SEC fines Citibank $38m for mishandling ADRs
Citibank N.A. has agreed to pay $38.7 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission (SEC) said in a bulletin this week.
U.S. securities that represent foreign shares of a foreign company, known as ADRs, must be matched by an equal number of foreign shares in custody at a depositary bank. They are subject to a practice called “pre-release.”
Pre-release allows ADRs to be issued without the deposit of foreign shares if a broker or its customer owns the required number of foreign shares and if the brokers receiving them have an agreement with a depositary bank.
But Citibank improperly pre-released ADRs to brokers in thousands of transactions, the SEC found, when neither the broker nor its customers had enough foreign shares. This inflated the number of a foreign issuer’s tradable securities, which led to inappropriate short selling and dividend arbitrage.
The SEC action against Citibank was its second against a depositary bank and sixth against a bank or broker amid an ongoing investigation into abusive ADR pre-release practices.
“Banks and brokerage firms profited while ADR holders were unaware of how the market was being abused,” said Sanjay Wadhwa, senior associate director of the SEC New York regional office.
Without admitting or denying the charges, Citibank agreed to pay more than $38.7 million, including a return of more than $20.9 million in profits from the illegal practices, $4.2 million in interest, and a $13.5 million penalty, the SEC release said. The SEC order acknowledged Citibank’s remedial acts and cooperation.
Andrew Dean, Joseph P. Ceglio, William Martin, Elzbieta Wraga, Philip Fortino, Richard Hong, and Adam Grace of the SEC’s New York office conducted the investigation under Wadhwa’s supervision.
© 2018 RIJ Publishing LLC. All rights reserved.
‘The Advice Opportunity’
Honorable Mention
RetireOne platform to offer Great American Index Protector 7 FIA
RetireOne will offer the Great American Index Protector 7 fixed indexed annuity on its platform for RIAs and other fee-based advisors who are looking for no-commission annuities for their clients, the two companies announced this week.
Great American Life partnered with Wade Pfau, Ph.D., and InStream Solutions to create a tool that simulates the effects of allocating part of a retirement portfolio to the Index Protector 7.
In addition to its collaboration with InStream, Great American Life has forged technology integrations with Quovo, Tamarac, Orion and others. ARIA Solutions’ RetireOne platform has provided fee-based insurance products to over 900 RIAs and fee-based advisors since 2011.
OneAmerica crosses $2bn mark in retirement plan sales
OneAmerica expects $2.34 billion in retirement plan sales by the end of 2018, a nearly 20% increase from $1.93 billion at the end of 2017. It will be the first $2 billion-plus sales year for the Indianapolis-based financial services firm.
OneAmerica provides administrative and participant services for nearly 12,000 plans with over $63 billion in assets under administration. Its regional sales directors work with advisors and advisor firms representing plans with $3 million to $250 million in participant assets.
OneAmerica focuses on tax-exempt 403(b) plans, plans for professional services firms and plans for manufacturing firms.
“Our recent announcements of OnePension and Personal Retirement Accounts, through Russell Investments, are just two examples of how we are helping participants prepare for retirement through a next-gen default investment solution and guaranteed lifetime income option.”
OneAmerica is the marketing name for the companies of OneAmerica. Insurance products are issued and underwritten by American United Life Insurance Co. (AUL), a OneAmerica company. Administrative and recordkeeping services are provided by McCready and Keene, Inc. or OneAmerica Retirement Services LLC.
401(k) balances reach new high-water marks: Fidelity
Fidelity Investments today released its quarterly analysis of retirement savings trends, including account balances, contributions and savings behavior, across more than 30 million retirement accounts. Highlights from this quarter’s analysis include:
- The average 401(k) balance reached an all-time high of $106,500, surpassing the previous record of $104,300 from Q4 2017. The average balance is seven percent higher than a year ago and 87% above the average balance of $56,900 in Q3 2008. The average IRA balance increased to $111,000, almost a 4% increase from last quarter and more than twice the average of $52,000 in Q3 2008. The average 403(b) account balance reached a record high of $85,500, nearly double the average balance of $43,300 in Q3 2008.
- The number of people with $1 million or more in their 401(k) increased to 187,400 at the end of Q3, an increase of 41% from the 133,000 401(k) millionaires in Q3 2017 and nearly 10 times the 19,300 savers with a $1 million in their 401(k) in Q3 2008. The number of IRA millionaires increased to 170,400 in Q3 2018, up 25% from a year ago.
- The overall average employee 401(k) contribution rate reached 8.7%, the highest level since Q4 2006. Contribution rates for women investors reached a record high with an 8.5% average rate in Q3. In addition, 32% of 401(k) women investors increased their contribution rate over the last year, compared with just 14% of 401(k) women investors who increased their contribution rate in the 12-month period ending in Q3 2008. IRA contributions among female Millennials increased 19% in the past year.
- Half of all 401(k) accounts now hold 100% of savings in a target date fund. For the first time, more than half (50.4%) of 401(k) savers have all of their assets in a target date fund. Just over 30% of overall 401(k) assets are in target date funds, up from 9.8% of overall assets in Q3 2008. In addition, slightly more than half (51%) of all “new” 401(k) contributions go into a target date fund. For 403(b) savers, the percentage of individuals who have all their assets in a target date fund climbed to 62%, a record high.
An analysis of 401(k) savers who have been in their plan for either five, 10 or 15 years straight revealed the following:
- Among workers who have been in their company’s 401(k) plan for five consecutive years, which is 32.2% of Fidelity’s entire 401(k) platform, the average balance reached $221,200 at the end of Q3, up from an average of $103,700 five years earlier. Among Millennials within this category, the average balance reached $82,000, up from $20,600 five years ago.
- Among participants who have been in their 401(k) plan for 10 years straight, the average balance reached $305,400, nearly five times the average balance of $65,700 for this group 10 years ago.
- The average 401(k) balance for workers who have been in their 401(k) plan continuously since Q3 2003 increased to $400,300 in Q3 2018, more than eight times the average balance of $47,800 for this same group in Q2 2003.
Empower offers new platform for IRA clients
Empower Retirement said this week that it will launch a digital consumer-focused wealth management platform for new and existing owners of Empower Individual Retirement Accounts as well as for prospective clients.
The new platform will bring investment advice, financial planning and insurance to “underserved mass affluent investors who may not currently work with a professional advisor as they make crucial personal financial decisions,” an Empower release said.
Empower will develop the platform in collaboration with Toronto-based Wealthsimple US, Ltd., and Dallas-based Apex Clearing Corp. Wealthsimple will build the user experience of the new retail platform. Apex will create and manage back office functions.
Empower, with approximately $570 billion in assets under administration and 8.7 million participants in 38,000 employer-sponsored retirement plans, is the nation’s second largest retirement plan provider.
Affordable Care Act co-ops lead insurance impairments: A.M. Best
Three health insurance co-ops (Consumer Operated and Oriented Plans) that were formed through the Affordable Care Act (ACA) became impaired in 2017, representing all U.S. life/health impairments in the last year and 18 of 20 impairments since 2015, according to a new A.M. Best special report.
The Best’s Special Report, titled, “2017 Life/Health Impairments Update,” states that from 2000 to 2017, 159 life/health insurers became impaired. The impairments consisted of 132 insolvent liquidations, 25 rehabilitations (of which 13 were closed during the period) and two conservation actions.
The significant challenge of operating as a qualified nonprofit health insurer under the ACA was the leading specific cause and was present in 19 of the impairments, A.M. Best said.
During the 2000-2017 period, 72% of the impairments concerned health (90) and accident and health (25) insurers, while 15% (24) related to small life insurers primarily focused on selling lower policy value industrial/burial or stipulated premium business in the South.
The remaining 13% of impairments involved five fraternal entities, eight annuity writers, and seven other life or combined life, annuity and health business. Six of the seven health insurer impairments in 2015 and nine of the 10 insurer impairments in 2016 related to the co-op plans.
Impairments are situations where companies are placed by court order into conservation, rehabilitation or insolvent liquidation. Supervisory actions undertaken by insurance department regulators without court order were not considered impairments for this study unless policyholder payments were delayed or limited.
Most impairments fell into the category of general business failure arising from a combination of poor strategic direction, weak operations, internal controls weaknesses or under-pricing and under-reserving the business.
© 2018 RIJ Publishing LLC. All rights reserved.
A Tax Break That Could Raise Retiree Income and Reduce the Deficit
Taxes raise money for government operations, but they also sometimes serve to change behavior in society. Taxes on cigarettes are a well-known example because they tend to cause smokers to quit, especially when the taxes approach the cost of a pack. Society further benefits from a reduction in health-related costs.
I propose a tax change that would provide retirees with more spendable (after-tax) income and change financial behavior.
The tax decrease also would reduce the federal deficit. But before we discuss the benefits to the Treasury, let’s describe how retirees get their boost in income.
Boost income for retirees
Many retirees are necessarily conservative in their investments in retirement, since they don’t have new savings dollars to make up for any losses when markets decline, nor time to wait for a recovery. Those conservative investments, like Treasury bonds and CDs, earn less than stocks over the long run, and generate less cash flow than riskier investments.
What people really need in retirement is more money, not less.
Here is what I would suggest to help retirees generate more income by changing their behavior.
This tax cut would increase revenue. Really.
An example:
A retiree who is 70 years old might decide to put most (70% is the recommended rule of thumb) of his or her rollover IRA money in conservative fixed investments earning an average of 3% today. In contrast, if the retiree annuitizes a portion of that IRA savings, he would receive about 8%. The tax collector would receive at least 2.5 times more tax revenue from that shift.
The IRS could simply keep 100% of that additional tax. But a decrease in the tax on that income would promote annuitization and give retirees more money to pay for late-in-life expenses like health care. It could also stimulate revenue growth and provide several other economic and societal benefits.
The concept works for retirees. The next step is convincing legislators that this would also be good for the overall economy.
Four benefits for the economy
Benefit 1: The government would generate as much or more revenue by encouraging annuitization.
Benefit 2: Retirees would have more money to spend, stimulating the economy.
Benefit 3: Would-be retirees now with more income might leave their jobs earlier, creating openings for younger workers.
Benefit 4: Increasing spendable retirement income would reduce pressure on social programs—especially Medicaid, which supports long-term care, and Social Security.
Retirees with more income, for example, could afford in-home care and stay in their residences. They also might choose to put off Social Security payments until they are 70, which delays cash outflow from the system.
Tax cuts for good reasons
The tax authorities do this already in other areas. For example, by granting life insurance favorable treatment, death benefit proceeds are received income tax-free. The origin of this benefit, I believe, was to encourage individuals to buy life insurance as a way of protecting widows and orphans.
Long-term care benefits are also income tax-free, again to ensure against a critical risk. Longevity is another actuarial risk that society will pay for one way or another.
A simple way to provide a tax break for the purchase of longevity insurance is to exclude a percentage, perhaps one-third, of annuitized payments from tax. Studies we’ve done show that approach is relatively neutral in terms of the total tax bill for a retiree’s retirement income.
To make sure this tax break is not abused, the exclusion could be capped. And the tax break could apply to any form of annuitized income, including those offered through corporate or government pension plans, as well as income annuities offered by insurance companies.
This tax break and the higher spendable income, in turn, would encourage more workers to invest more of their retirement savings accounts.
What else does it take for win-win?
In addition to legislating this new approach for the IRS, investors and their advisors need to think differently.
Traditional advice to retirees focuses on asset allocation: divide savings into various buckets to balance risk and reward. I advocate that investors instead concentrate on income allocation.
First, decide how much spendable income your savings can produce. Then decide how to create that income. This approach is also safe, and at its core produces guaranteed income for life via the allocation to annuitized income.
Retirees often are reluctant to put part of their savings into annuitized income. They either imagine the stock market will produce more money, or they are afraid to bet on their own longevity.
A tax break on annuitized income might persuade more retirees to consider an alternative that would benefit them—and U.S. coffers.
© 2018 Golden Retirement. Used by permission.
